1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8607
BELLSOUTH CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1533433
(State of Incorporation) (I.R.S. Employer
Identification Number)
1155 Peachtree Street, N. E., 30309-3610
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number 404 249-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
At April 30, 2000, 1,881,533,029 common shares were outstanding.
<PAGE>
Table of Contents
Item Page
Part I
1. Financial Statements
Consolidated Statements of Income ........................ 3
Consolidated Balance Sheets .............................. 4
Consolidated Statements of Cash Flows .................... 5
Consolidated Statements of Shareholders' Equity
and Comprehensive Income .............................. 6
Notes to Consolidated Financial Statements ............... 8
2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .......................15
3. Qualitative and Quantitative Disclosures about Market Risk ..26
Part II
6. Exhibits and Reports on Form 8-K ............................27
<PAGE>
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1999 2000
<S> <C> <C>
Operating Revenues:
Wireline communications:
Local service ............................ $2,654 $2,821
Network access ........................... 1,191 1,263
Long distance ............................ 150 135
Other wireline ........................... 280 285
Total wireline communications .......... 4,275 4,504
Domestic wireless ........................... 744 853
International operations .................... 561 664
Advertising and publishing .................. 343 364
Other ....................................... 50 102
Total Operating Revenues.................. 5,973 6,487
Operating Expenses:
Operational and support expenses ............ 3,253 3,568
Depreciation and amortization ............... 1,113 1,218
Severance accrual ........................... -- 78
Total Operating Expenses .................. 4,366 4,864
Operating Income ............................... 1,607 1,623
Interest Expense ............................... 226 306
Net Earnings (Losses) of Equity Affiliates ..... (266) 131
Other Income, net .............................. 59 83
Income Before Income Taxes ..................... 1,174 1,531
Provision for Income Taxes ..................... 559 530
Net Income ................................ $ 615 $1,001
Weighted-Average Common Shares
Outstanding:
Basic ....................................... 1,932 1,881
Diluted ..................................... 1,951 1,898
Dividends Declared Per Common Share ............ $ .19 $ .19
Earnings Per Share:
Basic ....................................... $ .32 $ .53
Diluted ..................................... $ .32 $ .53
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........... $ 1,287 $ 1,154
Temporary cash investments .......... 105 28
Accounts receivable, net of
allowance for uncollectibles
of $312 and $330 ................. 5,177 4,971
Material and supplies ............... 451 443
Other current assets ................ 367 524
Total Current Assets .............. 7,387 7,120
Investments and Advances ............. 6,097 6,710
Property, Plant and Equipment ........ 61,009 62,073
Less: accumulated depreciation ....... 36,378 37,139
Property, Plant and Equipment, net 24,631 24,934
Deferred Charges and Other Assets .... 1,564 1,652
Intangible Assets, net ............... 3,774 3,939
Total Assets ......................... $43,453 $44,355
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Debt maturing within one year ....... $7,653 $5,484
Accounts payable .................... 1,961 2,085
Other current liabilities ........... 3,781 3,918
Total Current Liabilities ......... 13,395 11,487
Long-Term Debt ....................... 9,113 10,880
Noncurrent Liabilities:
Deferred income taxes ............... 2,705 2,844
Unamortized investment tax credits .. 126 116
Other noncurrent liabilities ....... 3,299 3,331
Total Noncurrent Liabilities ...... 6,130 6,291
Shareholders' Equity:
Common stock, $1 par value
(4,400 shares authorized;
1,883 and 1,880
shares outstanding) ................... 2,020 2,020
Paid-in capital .......................... 6,771 6,775
Retained earnings ........................ 11,456 12,078
Accumulated other comprehensive income ... (358) (45)
Shares held in trust and treasury ........ (4,798) (4,892)
Guarantee of ESOP debt.................... (276) (239)
Total Shareholders' Equity ............. 14,815 15,697
Total Liabilities and Shareholders' Equity $43,453 $44,355
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1999 2000
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ............................................................ $ 615 $ 1,001
Adjustments to net income:
Depreciation and amortization ..................................... 1,113 1,218
Provision for uncollectibles ..................................... 84 89
Net losses (earnings) of equity affiliates ........................ 266 (131)
Dividends received from unconsolidated businesses.................. 14 9
Minority interests in income of subsidiaries ...................... 16 2
Deferred income taxes and unamortized investment tax credits ...... 104 (6)
Severance Accrual.................................................. -- 78
Net change in:
Accounts receivable and other current assets ...................... (11) 3
Accounts payable and other current liabilities .................... (308) 308
Deferred charges and other assets ................................. (128) (237)
Other liabilities and deferred credits ............................ (129) (34)
Other reconciling items, net .......................................... 6 50
Net cash provided by operating activities ......................... 1,642 2,350
Cash Flows from Investing Activities:
Capital expenditures .................................................. (1,387) (1,563)
Investments in and advances to unconsolidated businesses .............. (55) (26)
Purchases of licenses and other intangible assets ..................... (38) (69)
Proceeds from disposition of short-term investments ................... 181 137
Purchases of short-term investments ................................... (185) (64)
Proceeds from repayment of loans and advances.......................... 15 17
Other investing activities, net ....................................... 11 12
Net cash used for investing activities ............................ (1,458) (1,556)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt ........................ 982 (2,201)
Proceeds from long-term debt .......................................... 6 2,047
Repayments of long-term debt .......................................... (181) (295)
Dividends paid ........................................................ (371) (358)
Purchase of treasury shares ........................................... (1,841) (140)
Other financing activities, net ....................................... 17 20
Net cash used for financing activities ............................ (1,388) (927)
Net Decrease in Cash and Cash Equivalents .............................. (1,204) (133)
Cash and Cash Equivalents at Beginning of Period ....................... 3,143 1,287
Cash and Cash Equivalents at End of Period .............................$ 1,939 $ 1,154
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 2000
---------------------- ---------------------------------------------------------------------
Number of Shares Amount
--------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accum.
Shares Other Shares Guaran-
Held In Compre- Held In tee of
Common Trust and Common Paid-in Retained hensive Trust and ESOP
Stock Treasury Stock Capital Earnings Income Treasury Debt Total
(a) (a)
Balance at December 31, 1999 .......... 2,020 (138) $2,020 $6,771 $11,456 $(358) $(4,798) $(276) $14,815
Net income ............................ 1,001 1,001
Other comprehensive income, net of tax:
Foreign currency
translation adjustments ........... 32 32
Net unrealized gains
on securities ..................... 291 291
Minimum pension
liability adjustment .............. (10) (10)
Total comprehensive income ............ 1,314
Dividends declared .................... (357) (357)
Share issuances for
employee benefit plans .............. 1 (22) 46 24
Purchase of treasury stock ............ (3) (140) (140)
Tax benefit related to
stock options ....................... 4 4
ESOP activities and related
tax benefit ......................... 37 37
------ -------- -------- -------- -------- --------- -------- -------- -------
Balance at March 31, 2000 ............. 2,020 (140) $2,020 $6,775 $12,078 $ (45) $(4,892) $(239) $15,697
</TABLE>
(a)......Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of March 31, 2000, there were approximately 36
shares held in trust and 104 shares held in treasury.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
----------------------- ------------------------------------------------------------------
Number of Shares Amount
----------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accum.
Shares Other Shares Guaran-
Held In Compre- Held In tee of
Common Trust and Common Paid-in Retained hensive Trust and ESOP
Stock Treasury Stock Capital Earnings Income Treasury Debt Total
(a) (a)
Balance at December 31, 1998 ............ 2,020 (70) $2,020 $6,766 $9,479 $(64) $(1,752) $(339) $16,110
Net income .............................. 615 615
Other comprehensive income, net of tax:
Foreign currency
translation adjustments ............. (158) (158)
Total comprehensive income .............. 457
Dividends declared ...................... (369) (369)
Share issuances for
employee benefit plans ................ (10) 20 10
Purchase of treasury stock .............. (43) (1,841) (1,841)
Purchase of stock by grantor trust ...... (4) (4)
ESOP activities and related
tax benefit ........................... 3 36 39
------ ------- -------- ------- -------- ------ ---------- ------- --------
Balance at March 31, 1999 ............... 2,020 (113) $2,020 $6,766 $9,718 $(222) $(3,577) $(303) $14,402
</TABLE>
(a)......Trust and treasury shares are not considered to be outstanding for
financial reporting purposes. As of March 31, 1999, there were approximately 36
shares held in trust and 77 shares held in treasury.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars In Millions)
Note A - Preparation of Interim Financial Statements
In this report, BellSouth Corporation and its subsidiaries are referred to as
"we" or "BellSouth".
The accompanying unaudited consolidated financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods. In our opinion, these statements include all
adjustments necessary for a fair presentation of the results of the interim
periods shown. All adjustments are of a normal recurring nature unless otherwise
disclosed. Revenues, expenses, assets and liabilities can vary during each
quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year. For a more
complete discussion of our significant accounting policies and other
information, you should read this report in conjunction with the consolidated
financial statements included in our latest annual report on Form 10-K.
Certain amounts within the prior year's information have been reclassified to
conform to the current year's presentation.
Note B - Recent Accounting Pronouncements
Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue
Recognition in Financial Statements", (SAB 101). SAB 101 requires that revenues
and costs of revenues derived from services rendered at the beginning of a
contract or business relationship be deferred and recognized over the life of
the related contract or relationship. The guidelines in SAB 101 must be adopted
during the second quarter of 2000. We are currently assessing the impact that
adoption of these guidelines will have on our results of operations and
financial position.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was delayed
via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now
for fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. This means that the
standard must be adopted by us no later than January 1, 2001. We do not expect
the adoption of this standard will have a material impact on results of
operations, financial position or cash flows.
Note C - Earnings Per Share
Basic earnings per share is computed on the weighted-average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted-average number of common shares outstanding plus net incremental
shares arising out of employee stock options and benefit plans. The following is
a reconciliation of the weighted-average share amounts (in millions) used in
calculating earnings per share:
For the Three Months
Ended March 31,
1999 2000
Basic common shares outstanding ........... 1,932 1,881
Incremental shares from stock options ..... 19 17
Diluted common shares outstanding ......... 1,951 1,898
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
The earnings amounts used for per-share calculations are the same for both the
basic and diluted methods.
Note D - Segment Information
We have four reportable operating segments: (1) Wireline communications; (2)
Domestic wireless; (3) International operations; and (4) Advertising and
publishing. We have included the operations of all other businesses falling
below the reporting threshold in the "Other" segment. The "Reconciling items"
shown below include Corporate Headquarters and capital funding activities,
intercompany eliminations and other nonoperating items. The following table
provides information for each operating segment:
<TABLE>
<CAPTION>
First Quarter %
1999 2000 Change
<S> <C> <C> <C>
Wireline communications
External revenues ........................ $4,275 $4,504 5.4
Intersegment revenues .................... 48 72 50.0
Total revenues ......................... $4,323 $4,576 5.9
Operating income ......................... $1,413 $1,552 9.8
Segment net income ....................... $ 801 $ 863 7.7
Domestic wireless
External revenues ........................ $ 744 $ 853 14.7
Intersegment revenues .................... 4 4 --
Total revenues ......................... $ 748 $ 857 14.6
Operating income ......................... $ 87 $ 92 5.7
Net earnings (losses) of equity affiliates $ 31 $ 32 3.2
Segment net income ....................... $ 60 $ 60 --
International operations
External revenues ........................ $ 561 $ 664 18.4
Intersegment revenues .................... -- 11 N/M*
Total revenues ......................... $ 561 $ 675 20.3
Operating income ......................... $ 51 $ (2) N/M
Net earnings (losses) of equity affiliates $ (13) $ 17 N/M
Segment net income (loss) ................ $ (20) $ 14 N/M
Advertising and publishing
External revenues ........................ $ 343 $ 364 6.1
Intersegment revenues .................... 3 5 66.7
Total revenues ......................... $ 346 $ 369 6.6
Operating income ......................... $ 140 $ 145 3.6
Net earnings (losses) of equity affiliates $ (1) $ (1) --
Segment net income ....................... $ 84 $ 90 7.1
</TABLE>
* Not Meaningful
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note D - Segment Information (continued)
<TABLE>
<CAPTION>
First Quarter %
1999 2000 Change
Other
<S> <C> <C> <C>
External revenues ............................. $ 50 $ 102 N/M
Intersegment revenues ......................... 70 88 25.7
Total revenues .............................. $ 120 $ 190 58.3
Operating loss ................................ $ (84) $ (54) (35.7)
Net earnings (losses) of equity affiliates..... $ 1 $ -- N/M
Segment net loss .............................. $ (57) $ (39) (31.6)
Reconciling items
Intersegment revenues ......................... $ (125) $ (180) 44.0
Operating income (loss) ....................... $ -- $ (110) N/M
Net earnings (losses) of equity affiliates
(Note F).................................... $ (284) $ 83 N/M
Segment net income (loss)...................... $ (253) $ 13 N/M
</TABLE>
Note E - Marketable Securities
We have investments in marketable securities, primarily common stocks, which are
accounted for under the cost method. These investments are comprised primarily
of a 10% equity interest in Qwest and are classified as available-for-sale under
SFAS 115. Under SFAS 115, available-for-sale securities are required to be
carried at their fair value, with unrealized gains and losses (net of income
taxes) recorded in accumulated other comprehensive income (loss) in our
statement of changes in shareholders' equity and comprehensive income. The fair
values of our investments in marketable securities are determined based on
market quotations. The table below shows certain summarized information related
to these investments at March 31, 2000:
Gross Gross
Unrealized Unrealized
Cost gains losses Fair Value
Investment in Qwest .... $3,500 $ 55 $ -- $ 3,555
Other investments ....... 208 212 -- 420
Total .............. $3,708 $ 267 $ -- $ 3,975
We held no significant investments in marketable securities at March 31, 1999.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note F - Devaluation of Brazilian Currency
In mid January 1999, the Brazilian Government changed its foreign exchange
policy, extinguishing the exchange band through which it had managed the range
of the fluctuation of the Real in relation to the US Dollar, allowing the market
to freely determine the exchange rate. As a consequence of this change, the Real
devalued significantly in relation to the US Dollar in early 1999. The
devaluation and subsequent fluctuations in the exchange rate resulted in our
Brazilian wireless properties recording net currency losses related to the net
US Dollar-denominated liabilities. Our share of the foreign currency losses for
the first quarter of 1999 was $280.
Note G - Sublease of Communications Towers
In June 1999, we signed a definitive agreement with Crown Castle International
Corporation (Crown) for the sublease of all unused space on approximately 1,850
of our wireless communications towers in exchange for $610 to be paid in a
combination of cash and Crown common stock. As of March 31, 2000 we have closed
on 1,664 towers and received $548. Remaining towers covered by the agreement are
expected to be subleased throughout the remainder of 2000. We also entered into
a five-year, build-to-suit agreement with Crown covering up to 500 towers.
Under a similar agreement, Crown will sublease all unused space on 773 PCS
towers in exchange for $317 in cash. As of March 31, 2000, we have closed on 674
towers and received $277. Remaining towers covered by the agreement are expected
to be subleased throughout the remainder of 2000. In connection with this
agreement, we entered into an exclusive three-year, build-to-suit agreement.
Note H - Supplemental Cash Flow Information
For the Three Months
Ended March 31,
1999 2000
Cash Paid For:
Income taxes ................. $ 57 $111
Interest ..................... $ 159 $204
Note I - Summary Financial Information for Equity Investees
The following table displays the summary unaudited financial information for our
equity method businesses. These amounts are shown on a 100-percent basis.
For the Three Months
Ended March 31, %
1999 2000 Change
Revenues ................ $1,209 $1,515 25.3
Operating income ......... $ 29 $111 N/M
Net income (loss) ........ $(649) $ 38 N/M
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note J - Contingencies
Following the enactment of the Telecommunications Act of 1996, our telephone
company subsidiary, BellSouth Telecommunications, Inc. (BST), and various
competitive local exchange carriers (CLECs) entered into interconnection
agreements providing for, among other things, the payment of reciprocal
compensation for local calls initiated by the customers of one carrier that are
completed on the network of the other carrier. Numerous CLECs have claimed
entitlement from BST for compensation associated with dial-up calls originating
on BST's network and connecting with Internet service providers (ISPs) served by
the CLECs' networks. BST has maintained that dial-up calls to ISPs are not local
calls for which terminating compensation is due under the interconnection
agreements.
In February 1999, the FCC issued a decision that such ISP traffic does not
terminate at the ISP and, therefore, is interstate in nature, rather than local.
The FCC stated, however, that it would not interfere with prior state
commissions' decisions regarding this matter. The courts and state regulatory
commissions in BST's operating territory that have considered the matter have,
in most cases, ruled that BST is responsible for paying reciprocal compensation
on these calls. BST has appealed the adverse decisions and continues to believe
that it has a good legal basis for its position that such reciprocal
compensation is not owed to the CLECs. For those cases where BST believes it is
probable that it has incurred a liability, it has recorded an estimate of the
amount owed. At March 31, 2000, the exposure related to unrecorded amounts
withheld from CLECs was approximately $270, including accrued interest.
In March 2000, the United States Court of Appeals for the D.C. Circuit vacated
and remanded the FCC decision, concluding that the FCC had not adequately
explained its finding that ISP traffic was interstate. Based on statements made
by the FCC since the court's decision, we do not believe that this most recent
court decision adversely affects the ultimate outcome of pending state
proceedings. Nonetheless, we have commenced discussions with several CLECs
concerning settlement of some claims, and agreements have been reached in
certain circumstances.
Other reciprocal compensation issues
In a related matter, a CLEC was claiming terminating compensation of
approximately $165 for service arrangements that we did not believe involved
"traffic" under BST's interconnection agreements. BST filed a complaint with the
state regulatory commission asking that agency to declare that BST did not owe
reciprocal compensation for these arrangements. In March 2000, the state
commission ruled in BST's favor finding that compensation was not owed to the
CLEC.
Note K - Workforce Reduction
In February 2000, we announced that we would reduce our domestic general and
administrative staff by approximately 2,100 positions. These reductions are the
result of the streamlining of work processes in conjunction with our shift to a
more simplified management structure. As a result of these reductions, we
recorded a one-time charge of $78 ($48 after tax) for severance and
post-employment health benefits.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note L - E-Plus Restructuring
In February 2000 we formed a joint venture with KPN Royal Dutch Telecom (KPN)
through which KPN owns a 77.5% interest in E-Plus, a German mobile operator ,
and we own a 22.5% interest. We share control of E-Plus with KPN through our
ownership in the joint venture. We have the option, exercisable in July 2001, of
converting our 22.5% interest in the joint venture into either 100 million
shares of KPN or approximately 500 million shares of KPN Mobile. We also
received warrants to purchase approximately 46 million additional shares of KPN.
In conjunction with the restructuring, we recognized additional income of $68,
which is included in net earnings (losses) of equity affiliates.
Note M - Debt Issuance
In February 2000 we issued $2 billion of long-term debt, consisting of $1
billion of Ten-year, 7 3/4% Notes and $1 billion of Thirty-year, 7 7/8%
Debentures. We received total proceeds of $1,974, which was used to retire
commercial paper.
Note N - Tracking Stock
On March 29, 2000, we filed with the SEC a preliminary proxy statement relating
to a special shareholders' meeting to approve amendments to our restated
articles of incorporation. The amendments will permit us to issue our common
stock in series, of which our Board of Directors will initially designate two:
BLS Group stock and Latin America Group stock. Latin America Group stock is
intended to reflect the separate performance of the Latin America Group,
consisting of our Latin American businesses. BLS Group stock is intended to
track the separate performance of the BLS Group, consisting of all of our other
businesses and the BLS Group's ownership of the portion of the equity value of
the Latin America Group that is not sold or distributed. The amendments also
provide for each outstanding share of our existing common stock to be changed
into one share of BLS Group stock immediately before the completion of our
planned initial public offering of Latin America Group stock.
Our shareholders will also be asked at the special meeting to adopt an amended
and restated stock plan. This stock plan would, among other things, reflect the
tracking stock proposal by authorizing us to grant to our employees, officers
and directors awards based on shares of BLS Group stock and Latin America Group
stock.
At the same time we filed our preliminary proxy statement, we filed a
registration statement pursuant to which we plan to offer shares of Latin
America Group stock that represent a portion of the equity value of the Latin
America Group. The Latin America Group will use the proceeds from the initial
public offering to continue its expansion in Latin America and for other general
purposes.
We expect to distribute all of the shares representing the BLS Group's ownership
of the Latin America Group to the holders of BLS Group stock within six to
twelve months following the initial public offering. The decision to make such a
distribution and the precise timing will depend on market conditions and other
factors. After full distribution of the Latin America Group stock, ownership in
BellSouth will then be represented by two stocks: Latin America Group stock and
BLS Group stock.
Note O - Subsequent Events
Proposed Domestic Wireless Transaction
On April 4, 2000, we signed a definitive agreement with SBC Communications Inc.
(SBC) to create a national wireless business (Wireless Co.) comprised of
substantially all of both companies' US wireless assets. The new joint venture
will serve approximately 16.2 million subscribers and cover a geographical area
with a population of 175 million. Assuming that all of the assets are
contributed as provided for in the agreement, Wireless Co. will be 40% owned by
BellSouth and 60% owned by SBC. We will share joint and equal control of the
venture.
The joint venture will be a separately managed company capable of making
acquisitions and bidding on new or re-auctioned wireless frequencies. It may
issue debt and stock to the public to generate additional cash to fund expansion
and product development efforts. The agreement is subject to numerous
conditions, including regulatory approvals, and we expect the closing of the
venture to occur by the end of 2000.
<PAGE>
BELLSOUTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars In Millions)
Note O - Subsequent Event (continued)
Investment in Brazil
On May 4, 2000, we completed the purchase of a combination of voting common
stock and American Depository Receipts (ADRs) representing nonvoting preferred
stock of Tele Centro Oeste Celular Participacoes SA (TCO), a Brazilian company,
for a total purchase price of approximately $229. TCO holds the A Band cellular
concession in central-west Brazil, including Brasilia, as well as the B Band
cellular concession for northern Brazil through its 95% ownership in Norte
Brasil Telecom. The common stock portion of our investment represents 11.8% of
the voting power of TCO. The combined investment in common and preferred stock
represents 16.5% of the total capital of TCO. The investment will be accounted
for under the cost method of accounting.
<PAGE>
BELLSOUTH CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(Dollars in Millions, Except Per Share Amounts)
For a more complete understanding of our industry, the drivers of our business
and our current period results, you should read the following Management's
Discussion and Analysis of Results of Operations and Financial Condition (MD&A)
in conjunction with the MD&A in our latest annual report on Form 10-K.
- -------------------------------------------------------------------------------
Consolidated Results of Operations
- -------------------------------------------------------------------------------
Key financial and operating data for first quarter 2000 and 1999 are as follows:
------------------------ ------------
First Quarter %
------------------------
1999 2000 Change
----------- ------------ ------------
Revenues $5,973 $6,487 8.6
- ---------------------------------------- ----------- ------------ ------------
Expenses $4,366 $4,864 11.4
- ---------------------------------------- ----------- ------------ ------------
EBITDA(a) $2,720 $2,919 7.3
- ---------------------------------------- ----------- ------------ ------------
EBITDA margin 45.5% 45.0% -50bps
- ---------------------------------------- ----------- ------------ ------------
- ---------------------------------------- ----------- ------------ ------------
As Reported:
- ---------------------------------------- ----------- ------------ ------------
Net income $615 $1,001 62.8
- ---------------------------------------- ----------- ------------ ------------
Earnings per share $.32 $.53 65.6
- ---------------------------------------- ----------- ------------ ------------
Normalized:
- ---------------------------------------- ----------- ------------ ------------
Net income $895 $981 9.6
- ---------------------------------------- ----------- ------------ ------------
Earnings per share $.46 $.52 13.0
- ---------------------------------------- ----------- ------------ ------------
(a)......EBITDA represents income before net interest expense, income taxes,
depreciation and amortization, severance accrual, net earnings (losses) of
equity affiliates and other income, net. We present EBITDA because it is a
widely accepted financial indicator used by certain investors and analysts to
analyze and compare companies on the basis of operating performance and because
we believe that EBITDA is an additional meaningful measure of performance and
liquidity. EBITDA does not represent cash flows for the period, nor is it an
alternative to operating income (loss) as an indicator of operating performance.
You should not consider it in isolation or as a substitute for measures of
sperformance prepared in accordance with generally accepted accounting
principles. The items excluded from the calculation of EBITDA are significant
components in understanding and assessing our financial performance. Our
computation of EBITDA may not be comparable to the computation of similarly
titled measures of other companies. EBITDA does not represent funds available
for discretionary uses.
- -------------------------------------------------------------------------------
Overview
- -------------------------------------------------------------------------------
On a comparative basis, results reflect strong revenue growth in the core
wireline business driven by digital and data services revenues and significant
increases in our international and domestic wireless customer bases. Expense
growth was driven by volume increases at our international and domestic wireless
businesses and expenses for development and promotion of new business
initiatives, including high-speed data and Internet service offerings.
Normalized results for 2000 exclude the impacts of:
* Income related to the restructuring of our ownership interest in the
German wireless operator, E-Plus, which increased net income by $68
($0.04 per share) (this gain is included in Net Earnings (Losses) of
Equity Affiliates) (see Note L to the consolidated financial
statements for further discussion of this matter); and
* Expense recorded as a result of our previously announced plan to
reduce our domestic workforce, which reduced net income by $48 ($0.03
per share) (see Note K to the consolidated financial statements for
further discussion of this matter).
Normalized results for first quarter 1999 excludes the impact of the devaluation
of the Brazilian Real. Our share of the foreign currency losses in our Brazilian
wireless properties reduced net income by $280 ($0.14 per share) (this loss is
included in Net Earnings (Losses) of Equity Affiliates).
<PAGE>
- -------------------------------------------------------------------------------
Results by Segment
- -------------------------------------------------------------------------------
Our reportable segments reflect strategic business units that offer similar
products and services and/or serve similar customers. We have four reportable
operating segments: (1) Wireline communications; (2) Domestic wireless; (3)
International operations; and (4) Advertising and publishing. We have included
the operations of all other businesses falling below the reporting threshold in
the "Other" segment. We evaluate the performance of each business unit based on
net income, exclusive of charges for use of intellectual property rights and
adjustments for special items that may arise. Intersegment revenues and expenses
are not eliminated. Special items are transactions or events that are included
in reported consolidated results but are excluded from segment results due to
their nonrecurring or nonoperational nature. The results of businesses in which
we own noncontrolling interests are not included in our reported revenues and
expenses but are included in the Net Earnings (Losses) of Equity Affiliates line
item.
- -------------------------------------------------------------------------------
Wireline Communications
- -------------------------------------------------------------------------------
Wireline communications includes local exchange, network access and intraLATA
long distance services provided by wireline transport to business and
residential customers in a nine-state region located in the southeastern US.
First Quarter %
------------------------
1999 2000 Change
- ------------------------------------------------- ------------ -----------
Results of Operations
Operating revenues:
Local service $2,654 $2,821 6.3
Network access 1,191 1,263 6.0
Long distance 150 135 (10.0)
Other wireline 280 285 1.8
Intersegment revenues 48 72 50.0
- ------------------------------------------------- ------------ -----------
Total operating revenues $4,323 $4,576 5.9
- ------------------------------------------------- ------------ -----------
Operating expenses $2,910 $3,024 3.9
- ------------------------------------------------- ------------ -----------
Operating income $1,413 $1,552 9.8
- ------------------------------------------------- ------------ -----------
Segment net income $ 801 $ 863 7.7
- ------------------------------------------------- ------------ -----------
- ------------------------------------------------- ------------ -----------
EBITDA $2,246 $2,433 8.3
- ------------------------------------------------- ------------ -----------
EBITDA margin 52.0% 53.2% +120bps
- ------------------------------------------------- ------------ -----------
- ------------------------------------------------- ------------ -----------
Key Indicators
- ------------------------------------------------- ------------ -----------
Access line counts (000s):
- ------------------------------------------------- ------------ -----------
Switched access lines:
- ------------------------------------------------- ------------ -----------
Residential 16,764 17,234 2.8
- ------------------------------------------------- ------------ -----------
Business 7,325 7,230 (1.3)
- ------------------------------------------------- ------------ -----------
Other 272 262 (3.7)
- ------------------------------------------------- ------------ -----------
Total switched access lines 24,361 24,726 1.5
- ------------------------------------------------- ------------ -----------
Access line equivalents (a) 14,586 20,917 43.4
- ------------------------------------------------- ------------ -----------
Total equivalent access lines 38,947 45,643 17.2
- ------------------------------------------------- ------------ -----------
Access minutes of use (millions) 26,825 28,716 7.0
- ------------------------------------------------- ------------ -----------
- ------------------------------------------------- ------------ -----------
Long distance messages (millions) 177 136 (23.2)
- ------------------------------------------------- ------------ -----------
Digital and data services revenues $ 597 $ 767 28.5
- ------------------------------------------------- ------------ -----------
Convenience feature revenues $ 444 $ 515 16.0
- ------------------------------------------------- ------------ -----------
(a) Access line equivalents represent a conversion of non-switched data circuits
to a switched access line basis and is presented for comparability purposes.
Equivalents are calculated by converting data circuits (ISDN, ADSL, DS0, DS1 and
DS3) and SONET-based (optical) services (OC3 to OC48) to the equivalent of a
switched access line based on transport capacity. While the revenues generated
by access line equivalents have a directional relationship with these counts,
growth rates cannot be compared on an equivalent basis.
Operating Revenues
Local service
The $167 increase in local service revenues is attributable to growth in
switched access lines and strong demand for digital and data services and
convenience features.
We ended the first quarter with over 45 million total equivalent access lines,
an increase of 17.2% since March 31, 1999. Residential access lines rose 2.8% to
17,234,000, driven by economic growth in our nine-state region as well as demand
for secondary residence lines which accounted for 47.9% of the growth in
residential access lines. We added 225,000 secondary residence lines since March
31, 1999, extending the total to over 2.5 million lines and ending the current
period with a penetration rate of 17.1%. Business access lines, including both
switched access lines and data circuits, grew 28.5% propelled by expanding
demand for our digital and data services. Switched business access lines
decreased 1.3% reflecting continued migration of new and existing business
customers to high-capacity data lines.
Revenues from optional convenience features such as custom calling features
(e.g., Caller ID, Call Waiting, Call Return) and MemoryCall(R) service increased
$71 (16.0%) when compared to first quarter 1999. These increases were driven by
growth in convenience feature usage through our Complete Choice(R) Package, a
one-price bundled offering of over 20 features.
Increased penetration of extended local area calling plans also increased local
service revenues by approximately $49 compared to first quarter 1999.
Network access
Network access revenues grew $72 in the first quarter due largely to higher
demand. Access minutes of use rose 7.0% to 28,716 million in first quarter 2000
from 26,825 million in first quarter 1999. Increases in switched access lines
and promotional activities by long distance carriers continue to be the primary
drivers of the increase in minutes of use. First quarter 2000 growth in minutes
was also positively impacted by the additional day of activity resulting from
the leap year.
The growth rate in total minutes of use continues to be negatively impacted by
the trend of business customers migrating from traditional switched circuits to
higher capacity data line offerings which are fixed-charge based rather than
per-minute-of-use based. Revenues from these dedicated circuit services grew
approximately $59 as Internet service providers and high-capacity users
increased their use of our network. The growth rate in switched minutes of use
has also been negatively impacted by competition from CLECs whose traffic
completely bypasses our network.
Volume-related growth was largely offset by net rate impacts that decreased
revenues by $65 compared to first quarter 1999. These rate reductions are
primarily related to the FCC's access reform and productivity factor adjustment.
The reductions were partially offset by recoveries of local number portability
costs.
Long distance
The $15 decrease is primarily attributable to a 23.2% decrease in long distance
message volumes since first quarter 1999. The decrease was offset by the impact
in 1999 of a regulatory ruling related to compensation we receive from long
distance carriers for interconnection to our public payphones. Also offsetting
the decreases were increased revenues from the provision of digital and data
services.
Competition from alternative intraLATA long distance carriers and increased
penetration of extended local area calling plans continue to have an adverse
impact on our long distance message volumes. We believe that competition in the
intraLATA long distance market will continue to adversely impact long distance
message volumes and revenues.
Other wireline and intersegment revenues
Other wireline and intersegment revenues increased 8.8%, from $328 in first
quarter 1999 to $357 in first quarter 2000. Higher revenues from resale of
paging products and services, sales of unbundled network elements, collocation
of competing carriers' equipment in our facilities, demand for our Internet
access offering and interconnection charges to wireless carriers were offset by
decreases in revenues from sales of customer premises equipment. At March 31,
2000 we had 735,000 subscribers to our BellSouth Internet Service (sm), an
increase of 56.7% compared to the same 1999 period. The increase in intersegment
revenues primarily represents increased business activity with our other
operating segments.
Operating Expenses
Operational and support expenses
Operational and support expenses increased $66 (3.2%) for first quarter 2000
when compared to the first quarter 1999. The increase was attributable to
accruals related to reciprocal compensation, volume-related increases in
interconnection expense and higher payments to FCC mandated universal access
funds. These increases were offset by reductions in contract service expense and
volume-driven costs from sales of CPE and paging equipment. The increases were
further offset by lower pension and benefit costs attributable to favorable
pension plan investment returns.
Also contributing to the increase were expenses related to new data initiatives,
including Asymmetric Digital Subscriber Line (ADSL) and integrated
fiber-in-the-loop (IFITL), and promotional expenses related to expanding our
Internet customer base. We have made ADSL service available in 31 markets with
an addressable market of approximately 8 million access lines, and we plan to
increase the addressable market to 11.5 million access lines by the end of 2000.
In January 2000, we began offering a self-install kit for ADSL in seven cities
and announced a partnership with Darwin Networks to expand ADSL offerings to
additional areas in the southeastern US. We are deploying IFITL in nearly all
newly built neighborhoods and are also retrofitting some 200,000 existing homes
in Atlanta and Miami.
Depreciation and amortization
Depreciation and amortization expense increased $48 (5.8%) for first quarter
2000. The increase is primarily attributable to amortization of capitalized
internally developed software and depreciation resulting from higher levels of
net property, plant and equipment.
- -------------------------------------------------------------------------------
Domestic Wireless
- -------------------------------------------------------------------------------
Domestic wireless is comprised of cellular and personal communications service
(PCS) businesses principally within the southeastern US.
First Quarter %
-----------------------
1999 2000 Change
- ----------------------------------------------------- ------------ -----------
- ----------------------------------------------------- ------------ -----------
External revenues $ 744 $ 853 14.7
- ----------------------------------------------------- ------------ -----------
Intersegment revenues 4 4 --
- ----------------------------------------------------- ------------ -----------
Total operating revenues $ 748 $ 857 14.6
- ----------------------------------------------------- ------------ -----------
Operating expenses $ 661 $ 765 15.7
- ----------------------------------------------------- ------------ -----------
Operating income $ 87 $ 92 5.7
- ----------------------------------------------------- ------------ -----------
Net earnings (losses) of equity affiliates $ 31 $ 32 3.2
- ----------------------------------------------------- ------------ -----------
Segment net income $ 60 $ 60 --
- ----------------------------------------------------- ------------ -----------
- ----------------------------------------------------- ------------ -----------
EBITDA $ 225 $ 250 11.1
- ----------------------------------------------------- ------------ -----------
EBITDA margin 30.1% 29.2% -90bps
- ----------------------------------------------------- ------------ -----------
- ----------------------------------------------------- ------------ -----------
Customers (a) 4,486 5,196 15.8
- ----------------------------------------------------- ------------ -----------
Average monthly revenue per customer (a) $51 $51 --
- ----------------------------------------------------- ------------ -----------
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
Total operating revenues grew $109 or 14.6% compared to the same 1999 period,
which is attributable to higher airtime, access, and equipment sales revenues
driven by a 15.8% increase in the customer base. Adjusted for the sale of
Honolulu Cellular in August 1999, the customer growth rate would have been
19.1%. Advertising, enhanced volume pricing strategies (including one-rate
plans, bundled minutes at lower rates and prepaid calling plans) and competitive
incentive programs (such as discounted wireless handsets) were key drivers of
the customer growth. Revenue growth is also attributable to the initiation of
PCS service in 10 new markets in the southeastern US over the past twelve
months. Average monthly usage by customers increased during first quarter 2000,
and, when combined with the increase in total customers, drove increases in
total minutes of use. Average monthly revenue per customer remained relatively
flat, due primarily to declines in per-minute rates in response to competition.
The declines in average per-minute rates occurred as we expanded our product
offering and further penetrated lower-usage market segments, and we expect rates
to continue decreasing as more customers opt for our one-rate plans and other
bundled - minute packages.
We expect competition to continue to intensify and pressure pricing in our
markets. We believe this will further stimulate demand and continue to increase
usage as the overall market is expanded.
Operating Expenses
Operational and support expenses
Operational and support expenses increased $84 or 16.1% during first quarter
2000 due to higher customer acquisition costs, higher network costs associated
with network usage, and costs related to new customer promotions. Customer
acquisition costs increased as a result of a 34.3% increase in customer
additions from first quarter 1999 to first quarter 2000. Network usage and the
related expense have increased as a result of customer and volume growth in
established markets and the initiation of service in 10 PCS markets over the
past 12 months.
Our customer base continues to migrate from analog to digital service. We have
moved 75% of our subscriber base to digital and have increased digital minutes
of use to 75% of total network usage. Digital technology offers many advantages
over analog technology, including a three-fold gain in channel capacity, the
ability to provide advanced services and functionality and greater security.
Depreciation and amortization
Depreciation and amortization increased $20 (14.5%) to $158 during first quarter
2000. The increase was primarily attributable to the additions of property,
plant and equipment since March 31, 1999. These additions were primarily
attributable to the build-out of PCS markets and expansion of the network
related to growth in the customer base. The increase is also attributable to
accelerated depreciation on network equipment that is being replaced over an 18
month period from June 1999 through December 2000.
Net Earnings (Losses) of Equity Affiliates
Compared to first quarter 1999, 2000 equity in earnings (losses) of
unconsolidated domestic wireless businesses remained relatively flat. Higher
earnings at our business in Los Angeles were offset by decreases in earnings at
other properties.
- -------------------------------------------------------------------------------
International Operations
- -------------------------------------------------------------------------------
International operations is comprised principally of our investments in cellular
and PCS businesses in ten countries in Latin America as well as in Denmark,
Germany, India and Israel. Consolidated operations include our businesses in
Argentina, Chile, Ecuador, Nicaragua, Peru and Venezuela. All other businesses
are accounted for under the equity method, and accordingly their results are
reported as Net earnings (losses) of equity affiliates.
First Quarter %
---------------------
1999 2000 Change
- ---------------------------------------------------- ------------ -----------
- ---------------------------------------------------- ------------ -----------
External revenues $ 561 $ 664 18.4
- ---------------------------------------------------- ------------ -----------
Intersegment revenues -- 11 N/M*
- ---------------------------------------------------- ------------ -----------
Total operating revenues $ 561 $ 675 20.3
- ---------------------------------------------------- ------------ -----------
Operating expenses $ 510 $ 677 32.7
- ---------------------------------------------------- ------------ -----------
Operating income $ 51 $(2) N/M
- ---------------------------------------------------- ------------ -----------
Net earnings (losses) of equity affiliates $(13) $ 17 N/M
- ---------------------------------------------------- ------------ -----------
Segment net income (loss) $(20) $ 14 N/M
- ---------------------------------------------------- ------------ -----------
- ---------------------------------------------------- ------------ -----------
EBITDA $ 154 $ 122 (20.8)
- ---------------------------------------------------- ------------ -----------
EBITDA margin 27.5% 18.1% -940bps
- ---------------------------------------------------- ------------ -----------
- ---------------------------------------------------- ------------ -----------
Customers (a) 2,949 5,096 72.8
- ---------------------------------------------------- ------------ -----------
Average monthly revenue per customer (a) $ 61 $ 39 (36.1)
- ---------------------------------------------------- ------------ -----------
* Not Meaningful
(a) The amounts shown are for our consolidated properties and do not include
customer data for our unconsolidated properties.
Operating Revenues
The increase of $114 is primarily due to substantial growth in the customer
bases of our consolidated operations, which collectively have grown almost 72.8%
since March 31, 1999. Partially offsetting the impacts of customer growth is
declining monthly revenue per customer that is driven by continued expansion
into lower-usage customer segments through offerings such as prepaid cellular
service and competitive pressures in certain countries. We now offer prepaid
cellular products to all of the countries we serve in Latin America. Overall
weakening of local currencies also impacted revenue growth on a US Dollar basis.
The current period also includes $10 of revenues from our operations in
Nicaragua that was consolidated for the first time in first quarter 2000.
Operating Expenses
Operational and support expenses
For first quarter 2000, these expenses increased $146 compared to first quarter
1999. This increase is primarily the result of operational and customer
acquisition costs associated with growth in customer levels and expanded
operations. Since March 31, 1999, our existing operations have added almost 2.0
million customers in Argentina, Chile and Venezuela. We have also added 182,000
customers through the acquisition and development of businesses in Ecuador,
Nicaragua and Peru.
Depreciation and amortization
Depreciation expense increased $19 due primarily to higher gross depreciable
plant resulting from the continued investment in our wireless network
infrastructure. Amortization expense increased $2 as a result of growth in
intangibles related to our purchase of additional ownership interests in several
Latin American operations.
Net Earnings (Losses) of Equity Affiliates
Net earnings (losses) from our equity affiliates improved $30 to $17 in first
quarter 2000. The improvement in our unconsolidated international businesses is
due to stronger results from our investments in Brazil and Germany. Both of
these businesses experienced substantial growth in their customer bases. Net
earnings (losses) of equity affiliates for the international operations segment
for 2000 excludes $68 in income related to the restructuring of our ownership
interest in our German wireless operations (see Note L to the consolidated
financial statements for further discussion of this matter). Net earnings
(losses) of equity affiliates for the international operations segment for 1999
exclude $280 in foreign currency losses related to the devaluation of the
Brazilian Real in January 1999 (see Note F to the consolidated financial
statements for further discussion of this matter). The impact of foreign
currency fluctuations in Brazil for first quarter 2000 was not significant.
- -------------------------------------------------------------------------------
Advertising and Publishing
- -------------------------------------------------------------------------------
Our advertising and publishing segment is comprised of companies in the US and
Latin America that publish, print, sell advertising in and perform related
services concerning alphabetical and classified telephone directories and
electronic product offerings.
First Quarter %
-----------------------
1999 2000 Change
- ----------------------------------------------------- ------------ -----------
- ----------------------------------------------------- ------------ -----------
External revenues $343 $364 6.1
- ----------------------------------------------------- ------------ -----------
Intersegment revenues 3 5 66.7
- ----------------------------------------------------- ------------ -----------
Total operating revenues $346 $369 6.6
- ----------------------------------------------------- ------------ -----------
Operating expenses $206 $224 8.7
- ----------------------------------------------------- ------------ -----------
Operating income $140 $145 3.6
- ----------------------------------------------------- ------------ -----------
Net earnings (losses) of equity affiliates $ (1) $ (1) --
- ----------------------------------------------------- ------------ -----------
Segment net income $84 $90 7.1
- ----------------------------------------------------- ------------ -----------
- ----------------------------------------------------- ------------ -----------
EBITDA $146 $155 6.2
- ----------------------------------------------------- ------------ -----------
EBITDA margin 42.2% 42.0% -20bps
- ----------------------------------------------------- ------------ -----------
Operating Results
External revenues increased $21 for first quarter 2000, principally as a result
of revenues from our new directory publishing operations in Peru and Brazil. The
growth is also attributable to volume growth and price increases in the domestic
operations, offset by the effects of shifts in directory production schedules.
Adjusted for book shifts, external revenues for this segment would have
increased by approximately 10.6% for the quarter. Also contributing to the
increase are the revenues from our electronic media offerings.
Operational and support expenses increased $14 for first quarter 2000, due
primarily to our new operations in Peru and costs associated with growth in
electronic media offerings. These increases were offset by lower costs in the
domestic directory businesses due to the shift in directory production
schedules. Depreciation and amortization increased by $4 due to the new
international publishing operations.
Net earnings (losses) of equity affiliates includes the results of our
investment in a Brazilian directory publisher.
- -------------------------------------------------------------------------------
Other
- -------------------------------------------------------------------------------
This segment is primarily comprised of new business initiatives such as
entertainment (cable and wireless television), Internet access, wireless data
and interLATA long distance. The stand-alone revenues and expenses of our
Internet access marketing company which are included in this segment are
eliminated in consolidation and reported as part of the wireline communications
results.
First Quarter %
---------------------
1999 2000 Change
- ----------------------------------------------------- ----------- --------------
- ----------------------------------------------------- ----------- --------------
External revenues $ 50 $102 N/M
- ----------------------------------------------------- ----------- --------------
Intersegment revenues 70 88 25.7
- ----------------------------------------------------- ----------- --------------
Total operating revenues $ 120 $ 190 58.3
- ----------------------------------------------------- ----------- --------------
- ----------------------------------------------------- ----------- --------------
Operating expenses $ 204 $ 244 19.6
- ----------------------------------------------------- ----------- --------------
Operating loss $(84) $(54) (35.7)
- ----------------------------------------------------- ----------- --------------
Net earnings (losses) of equity affiliates $ 1 $ -- N/M
- ----------------------------------------------------- ----------- --------------
Segment net loss $(57) $(39) (31.6)
- ----------------------------------------------------- ----------- --------------
- ----------------------------------------------------- ----------- --------------
EBITDA $(53) $(24) (54.7)
- ----------------------------------------------------- ----------- --------------
EBITDA margin (44.2%) (12.6%) N/M
- ----------------------------------------------------- ----------- --------------
Operating Results
External revenues increased $52 for first quarter 2000 driven by growth in
revenues from the resale of interLATA long distance services in markets outside
of our wireline region, interactive paging services and wireless television
offerings.
Operating expenses reflect increased spending associated with new product and/or
market introductions in all of these businesses. Higher headcount associated
with customer support and installation functions also contributed to the
increase in expenses. Depreciation and amortization has increased reflecting our
continuing investment of resources associated with the growth of these
businesses.
- -------------------------------------------------------------------------------
Other Nonoperating Items
- -------------------------------------------------------------------------------
First Quarter %
-----------------------
1999 2000 Change
- --------------------------------------------------- ------------ --------------
- --------------------------------------------------- ------------ --------------
Interest Expense $226 $306 35.4
- --------------------------------------------------- ------------ --------------
- --------------------------------------------------- ------------ --------------
Net Earnings (Losses) of Equity Affiliates (266) 131 N/M
- --------------------------------------------------- ------------ --------------
- --------------------------------------------------- ------------ --------------
Other Income, net 59 83 40.7
- --------------------------------------------------- ------------ --------------
- --------------------------------------------------- ------------ --------------
Provision for Income Taxes 559 530 (5.2)
- --------------------------------------------------- ------------ --------------
- --------------------------------------------------- ------------ --------------
Effective Tax Rate 47.6% 34.6% -1,300bps
- --------------------------------------------------- ------------ --------------
Interest expense
Higher interest expense in 2000 is attributable to higher average debt balances
resulting from borrowings associated with the financing of our investment in
Qwest and increases in interest rates. Our average debt balances were as
follows:
First Quarter %
--------------------
1999 2000 Change
- ------------------------------------------------ ----------- ------------
- ------------------------------------------------ ----------- ------------
Average short-term debt balance $ 4,203 $ 6,817 62.2
- ------------------------------------------------ ----------- ------------
Average long-term debt balance $ 8,572 $ 9,909 15.6
- ------------------------------------------------ ----------- ------------
- ------------------------------------------------ ----------- ------------
Total average debt balance $12,775 $16,726 30.9
- ------------------------------------------------ ----------- ------------
Net earnings (losses) of equity affiliates
Earnings from our unconsolidated businesses increased $397 in first quarter 2000
compared to first quarter 1999. First quarter 2000 results include $68 in income
related to the restructuring of our ownership interest in our German wireless
operations (see Note L to the consolidated financial statements for further
discussion of this matter). First quarter 1999 includes foreign exchange losses
of $280 related to our Brazilian properties (see Note F to the consolidated
financial statements for further discussion of this matter). Excluding the
impact of these items, first quarter 2000 earnings increased $49 when compared
to first quarter 1999. These results are addressed in the discussions for the
Domestic wireless, International operations and Other segments.
Other income, net
Other income, net includes interest income, gains/losses on disposition of
assets, foreign currency gains/losses and miscellaneous nonoperating income. The
increase of $24 is attributable to higher minority interest income related to
our less-than-100-percent owned subsidiaries and increased foreign currency
gains primarily in Chile. These decreases were partially offset by a decrease in
interest income.
Provision for income taxes
The provision for income taxes decreased $29. The decrease in the effective tax
rate is due primarily to more favorable results at foreign equity-method
subsidiaries which are recorded net of tax benefits or expense. First quarter
2000 results were favorably impacted by additional income related to the
restructuring of our ownership in E-Plus. First quarter 1999 results were
unfavorably impacted by foreign currency losses recorded at our unconsolidated
Brazilian businesses. Excluding these items, our effective rate was 36.3% for
first quarter 2000 and 38.4% for first quarter 1999.
- -------------------------------------------------------------------------------
Financial Condition
- -------------------------------------------------------------------------------
Cash flows from operations are our primary source of funding for capital
requirements of existing operations, debt service and dividends. We also have
ready access to capital markets in the event additional funding is necessary.
While current liabilities exceed current assets, our sources of funds --
primarily from operations and, to the extent necessary, from readily available
external financing arrangements -- are sufficient to meet all current
obligations on a timely basis. We believe that these sources of funds will be
sufficient to meet the needs of our business for the foreseeable future.
Net cash provided by (used for):
- ------------------------------------------------------------------------
1999 2000 Change
--------------------------------------------------
Operating activities.. $1,642 $2,350 $708 43.1%
Investing activities.. $(1,458) $(1,556) $(98) 6.7%
Financing activities.. $(1,388) $(927) $461 (33.2)%
- ------------------------------------------------------------------------
Net cash provided by operating activities
The increase in cash from operations primarily reflects decreases in working
capital requirements and higher EBITDA. Operating cash flows for 2000 also
include $31 in cash proceeds associated with the closings of our agreements to
sublease wireless communications towers to Crown. Additional closings are
scheduled to be completed throughout the remainder of 2000.
Net cash used in investing activities
During the first three months of 2000, we invested $1.6 billion for capital
expenditures to support our wireline and wireless networks, to promote the
introduction of new products and services and increase operating efficiency and
productivity. Significant investments are also being made to support deployment
of ADSL and fast packet switching technologies as well as our IFITL initiative.
Included in these expenditures for first quarter 2000 are approximately $155 in
costs related to the purchase and development of internal-use software.
Net cash used in financing activities
During first quarter 2000, we issued $2 billion of long-term debt. The proceeds
of $1,974 from this issuance were used to retire commercial paper borrowings.
Our debt to total capitalization ratio was 51.0% at March 31, 2000 compared to
53.1% at December 31, 1999. The decrease is a function of increases in
shareholders' equity, driven by income from operations and net unrealized gains
on securities.
At May 3, 2000, we had shelf registration statements on file with the SEC under
which $2.7 billion of debt securities could be publicly offered.
Market Risk
For a complete discussion of our market risks, you should refer to the caption
"Market Risk" in our 1999 Annual Report on Form 10-K. Our primary exposure to
market risks relates to unfavorable movements in interest rates and foreign
currency exchange rates. We do not anticipate any significant changes in our
objectives and strategies with respect to managing such exposures.
- -------------------------------------------------------------------------------
Operating Environment and Trends of the Business
- -------------------------------------------------------------------------------
Regulatory Developments
Our future operating and financial results will be substantially influenced by
developments in a number of federal and state regulatory proceedings. Adverse
results in these proceedings could materially affect our revenues, expenses and
ability to compete effectively against other telecommunications carriers.
Federal policies being implemented by the Federal Communications Commission
(FCC) strongly favor access reform, whereby the historical subsidy for local
service that is contained in network access charges paid by long distance
carriers is eliminated. Unless compensatory changes are adopted, such as
Universal Service Fund contribution mandates, our revenues from this source are
at risk. In addition, other aspects of access charge regulation and Universal
Service Fund contribution requirements that are applicable to local service
carriers such as BST are also under consideration and could result in greater
expense levels or reduced revenues.
During first quarter 2000, a coalition of local and long distance providers,
including BellSouth, Bell Atlantic, GTE, SBC, AT&T and Sprint submitted a
proposal designed to result in lower consumer prices for long distance service
by reforming the way in which access costs are recovered. The proposal is a
comprehensive package that would adjust the FCC's price cap, access charge and
universal service rules for those price cap local exchange carriers electing to
adopt the proposal. The FCC asked for and received public comment on this
proposal and is expected to reach a decision by midyear. If this proposal were
approved, rates for access charges, and the revenues which we derive from access
charges, would be reduced.
The FCC has considerable authority to establish pricing, interconnection and
other policies that had once been considered within the exclusive jurisdiction
of the state public service commissions. We expect the FCC to accelerate the
growth of local service competition by aggressively utilizing such power.
We have petitioned the FCC for permission under the 1996 Act to offer full long
distance services in South Carolina and Louisiana. The FCC has denied these
petitions. We have been testing our operations support systems in Georgia and
expect to file with the FCC during the second quarter of 2000. We do not know if
the FCC will require further changes in our interconnection and network element
offerings and operations support systems before it will approve such petitions.
These changes could result in significant additional expenses and promote local
service competition. In December 1999, the FCC granted the first approval to
another Baby Bell to provide in-region interLATA service.
Our intrastate prices are regulated under price regulation plans provided by
statute or approved by state public service commissions. Some plans are subject
to periodic review and may require renewal. These commissions generally may
require price reductions and/or other concessions from us as conditions to
approving these plans.
In North Carolina, we reached a joint stipulation with the North Carolina Public
Staff and AT&T regarding revisions to the price regulation plan, switched access
reductions, ADSL deployment and service quality issues. The North Carolina
Utilities Commission conducted a hearing in late April on the Joint Stipulation,
and a decision by that commission on approval of the stipulation is pending.
We are involved in numerous legal proceedings associated with state and federal
regulatory matters, the disposition of which could materially impact our
operating results and prospects. See Note J to the consolidated financial
statements.
International Operations
Our reporting currency is the US Dollar. However, most of our revenues are
generated in the currencies of the countries in which we operate. In addition,
many of our operations and equity investees hold US Dollar-denominated short-
and long-term debt. The currencies of many Latin American countries have
experienced substantial volatility and depreciation in the past. Declines in the
value of the local currencies in which we are paid relative to the US Dollar
will cause revenues in US dollar terms to decrease and dollar-denominated
liabilities to increase. Where we consider it to be economically feasible, we
attempt to limit our exposure to exchange rate fluctuations by using foreign
currency forward exchange contracts or similar instruments as a vehicle for
hedging; however, a substantial amount of our exposures are unhedged.
The impact of a devaluation or depreciating currency on an entity depends on the
residual effect on the local economy and the ability of an entity to raise
prices and/or reduce expenses. Our ability to raise prices is limited in many
instances by government regulation of tariff rates. Due to our constantly
changing currency exposure and the potential substantial volatility of currency
exchange rates, we cannot predict the effect of exchange rate fluctuations on
our business.
Economic, social and political conditions in Latin America are, in some
countries, unfavorable and volatile, which may impair our operations. These
conditions could make it difficult for us to continue development of our
business, generate revenues or achieve or sustain profitability. Historically,
recessions and volatility have been primarily caused by: mismanagement of
monetary, exchange rate and/or fiscal policies; currency devaluations;
significant governmental influence over many aspects of local economies;
political and economic instability; unexpected changes in regulatory
requirements; social unrest or violence; slow or negative economic growth;
imposition of trade barriers; and wage and price controls.
Most or all of these factors have occurred at various times in the last two
decades in our core Latin American markets. We have no control over these
matters. Economic conditions in Latin America are generally less attractive than
those in the US, and poor social, political and economic conditions may inhibit
use of our services which may adversely impact our business.
New Accounting Pronouncements
Revenue Recognition
In December 1999, the SEC issued Staff Accounting Bulletin Number 101, "Revenue
Recognition in Financial Statements", (SAB 101). SAB 101 requires that revenues
and costs of revenues derived from services rendered at the beginning of a
contract or business relationship be deferred and recognized over the life of
the related contract or relationship. The guidelines in SAB 101 must be adopted
during the second quarter 2000. We are currently assessing the impact that
adoption of these guidelines will have on our results of operations and
financial position.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was delayed
via the issuance of SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement 133". The effective date for SFAS No. 133 is now
for fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. This means that the
standard must be adopted by us no later that January 1, 2001. We do not expect
that the adoption of this standard will have a material impact on results of
operations, financial position or cash flows.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See the caption labeled "Market Risk" in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
- -------------------------------------------------------------------------------
Cautionary Language Concerning Forward-Looking Statements
- -------------------------------------------------------------------------------
In addition to historical information, management's discussion and analysis
contains forward-looking statements regarding events and financial trends that
may affect our future operating results, financial position and cash flows.
These statements are based on our assumptions and estimates and are subject to
risks and uncertainties. For these statements, we claim the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
Factors that could affect future operating results, financial position and cash
flows and could cause actual results to differ materially from those expressed
in the forward-looking statements are:
* a change in economic conditions in domestic or international markets
where we operate or have material investments, which would affect
demand for our services; - the intensity of competitive activity and
its resulting impact on pricing strategies and new product offerings;
* protracted delay in our entry into the interLATA long distance market;
* higher than anticipated start-up costs or significant up-front
investments associated with new business initiatives;
* unanticipated higher capital spending from, or delays in, the
deployment of new technologies; and
* unsatisfactory results in regulatory actions including access
reform, universal service, terms of interconnection and unbundled
network elements and resale rates.
This list of cautionary statements is not exhaustive. These and other
developments could cause our actual results to differ materially from those
forecast or implied in the forward-looking statements. You are cautioned not to
place undue reliance on these forward-looking statements, which are current only
as of the date of this filing. We have no obligation, and we do not intend, to
publicly release the results of any revisions to these forward-looking
statements to reflect events or circumstances after the date of this filing.
- -------------------------------------------------------------------------------
PART II -- OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number
4a No instrument which defines the rights of holders of our long-
and intermediate-term debt is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
regulation, we agree to furnish a copy of any such instrument
to the SEC upon request.
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of March 31, 2000.
(b) Reports on Form 8-K:
Date of Event Subject
January 24, 2000 BellSouth 4Q99 Earnings Release
February 4, 2000 Organizational Announcement regarding domestic workforce
reduction; February 8, 2000 Analyst Meeting Comments
February 14, 2000 Form of Note and Debenture
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELLSOUTH CORPORATION
By /s/ Ronald M. Dykes
RONALD M. DYKES
Chief Financial Officer
(Principal Accounting Officer)
May 5, 2000
<PAGE>
EXHIBIT INDEX
Exhibit
Number
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of March 31, 2000.
EXHIBIT 11
BellSouth Corporation
Computation of Earnings Per Share
For the Three Month Period Ended
March 31,
1999 2000
Basic Earnings Per Common Share:
Net Income $ 615 $ 1,001
Weighted average shares
Outstanding 1,932 1,881
Earnings Per Common Share $ .32 $ .53
For the Three Month Period Ended
March 31,
1999 2000
Diluted Earnings per Common Share:
Net Income $ 615 $ 1,001
Weighted average shares
Outstanding 1,932 1,881
Incremental shares from
Assumed exercise of
stock options and payment of
performance share awards 19 17
Total Shares 1,951 1,898
Earnings Per Common Share $ .32 $ .53
EXHIBIT 12
BellSouth Corporation
Computation Of Earnings To Fixed Charges
(Dollars In Millions)
For the Three Months
Ended March 31,
2000
1. Earnings
(a) Income from continuing
operations before deductions
for taxes and interest $ 1,837
(b) Portion of rental expense
representative of interest
factor 28
(c) Equity in losses from
less-than-50%-owned
investments (accounted
for under the equity
method of accounting) 13
(d) Excess of earnings over
distributions of less-
than-50%-owned investments
(accounted for under the
equity method of accounting) (51)
TOTAL $ 1,827
2. Fixed Charges
(a) Interest $ 316
(b) Portion of rental expense
representative of interest
factor 28
TOTAL $ 344
Ratio (1 divided by 2) 5.31
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,154
<SECURITIES> 28
<RECEIVABLES> 5,301
<ALLOWANCES> 330
<INVENTORY> 443
<CURRENT-ASSETS> 7,120
<PP&E> 62,073
<DEPRECIATION> 37,139
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<CURRENT-LIABILITIES> 11,487
<BONDS> 10,880
0
0
<COMMON> 2,020
<OTHER-SE> 13,677
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<SALES> 180
<TOTAL-REVENUES> 6,487
<CGS> 189
<TOTAL-COSTS> 3,374
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<INCOME-PRETAX> 1,531
<INCOME-TAX> 530
<INCOME-CONTINUING> 1,001
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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